Landlord and tenant — Rent review clause in lease — Construction — Appeal from part of decision of Scott J — The difficulties in this case had arisen in determining what exactly were the terms of the hypothetical lease which had to be assumed in arriving at the ‘commercial yearly rent’ for the purposes of the rent review clause — After providing that such rent should be the open market rent of a lease for a term equal to the residue of the actual term of the current lease, the review clause stated that the hypothetical lease was to be ‘in the same terms in all other respects as these presents’ — The construction problems were due to the fact that both the user covenant and the restriction of assignment covenant contained a specific reference to the lessee by name, ‘the British Crafts Centre’ — The user covenant permitted the use of part of the premises for storage, sale and display of craftsmen’s work while the lessee was the British Crafts Centre — The covenant restrictive of assignment permitted the sharing of occupation with a holding or subsidiary company, ‘but only whilst the lessee is the British Crafts Centre’ — The relevance was that the broader the class of potential lessees the higher the rent that might be expected to be obtained — The tenants had accordingly contended that the provisions should be construed narrowly, directed to the particular personal position of the British Crafts Centre as such, whereas the landlords had argued that they should be taken to refer to the lessee who took the hypothetical lease, whoever that lessee might turn out to be — Scott J decided that the two covenants should be construed as applying differently in this respect — He held that in the case of the user covenant it was intended to grant a personal privilege to the Centre and
The following
case is referred to in this report.
Law
Land Co Ltd v Consumers’ Association (1980)
255 EG 617, [1980] 2 EGLR 109, CA
This was an
appeal by the plaintiff landlords, Robert Hedley James and Christopher Brian
Carr, from part of the decision of Scott J (reported at [1986] 1 EGLR 117;
(1986) 277 EG 976) in regard to the construction of the rent review clause in a
lease to the respondent tenants, British Crafts Centre, of premises at 43
Earlham Street, Covent Garden, London WC2.
J P Whittaker
(instructed by Hempsons) appeared on behalf of the appellants; Paul de la
Piquerie (instructed by Sacker & Partners) represented the respondents.
Giving
judgment, MAY LJ said: This is an appeal from a decision of Scott J on the
hearing of an originating summons between the present appellants as plaintiffs
and the respondent as defendant on October 30 1985. That originating summons
sought declarations as to the proper construction of a rent review clause in a
lease dated August 12 1977 entered into between the appellants’ predecessors in
title as lessors and the present respondent as lessee.
The demised
premises were 43 Earlham Street, Covent Garden, London WC2. The term granted by
the lease was one of 14 years from September 29 1976. The rent originally
reserved by the lease was £10,500 per year.
The premises
comprised four floors; basement, ground floor and two floors above. It seems
that at the date of the lease the defendant respondent was already in
occupation of the basement and ground floor. The first floor was let to a
company known as High Vision Ltd.
The learned
judge in his judgment referred to two planning permissions that were in
existence in relation to the premises, but for my part I do not think they take
the matter of proper construction of the lease any further and I do not propose
to refer to them in detail.
I turn to the
lease itself in which in particular the respondent, the British Crafts Centre,
is referred to in this way:
hereinafter
called ‘the Lessee’ which expression where the context so admits includes the
persons or corporate body in whom the term hereby granted may from time to time
be vested.
For the
purposes of the present appeal I turn to clause 2 (16) of the lessee’s
covenants which, in so far as material, reads as follows:
not to use or
permit or suffer the demised premises or any part thereof to be used for any
purpose other than
(i) for high class business commercial or
professional offices . . . or
(ii) in respect of such part of the demised
premises as shall for the time being be occupied and used by the Lessee (here
meaning The British Crafts Centre party hereto) for storage sale and display of
craftsmens work and ancillary offices and in respect of the first floor of the
demised premises (whilst not occupied and used by British Crafts Centre) as an
office and studio for the trade or business of designers advertising and press
agents.
I then move to
the next of the lessee’s covenants, that is the one against alienation of the
term, and, again omitting immaterial parts, it reads in this way:
Not to assign
. . . demise underlet or otherwise part with possession of any part of the
demised premises (here meaning a portion only and not the whole thereof) or
(subject to the provisions of paragraph (ii) of this sub-clause) . . . to share
occupation of the whole or any part thereof for all or any part of the said
term . . .
(ii) Notwithstanding the provisions of paragraph
(i) of this sub-clause . . . but only whilst the Lessee is The British Crafts
Centre the Lessee may share occupation of the demised premises or any part
thereof with a holding or subsidiary company of it or a subsidiary of such
holding company . . .
That covenant went
on to contain a number of provisos. In my opinion, however, they do not take
the matter any further.
I then turn to
the rent review clause, which was clause 5 in the lease. In general terms that
provided for a rent review upon notice in writing by the lessors at five-year
intervals and for the assessment of what was described in the lease as ‘the
commercial yearly rent’ at the quinquennial review date, and for the payment of
that assessed rent from that review date, if when assessed it was greater than the
rent then actually being paid.
Finally, in so
far as the lease is concerned, I turn to the definition in clause 5 of the
commercial yearly rent. That reads as follows:
‘The
commercial yearly rent’ means the clear yearly rent at which the demised premises,
assuming the due performance and observance of the covenants on the part of the
lessee and conditions contained in these presents, might reasonably be expected
to be let at the review date by a willing landlord in the open market with
vacant possession and without premium or any other consideration than that
evidenced by execution of a lease thereof to a willing tenant for a term equal
to the residue then unexpired of the term hereby granted by a lease in the same
terms in all other respects as these presents (including this sub-clause).
There then
followed various sub-clauses, but again these are immaterial for the purposes
of the present appeal.
The basic
issue in the latter is whether in the hypothetical new lease on offer as
contemplated in the definition of the commercial yearly rent which I have just
quoted, the user for storage, sale and display of craftsmen’s work and the
ancillary offices referred to in the ‘user clause’ is limited to the
respondent, the British Crafts Centre, and no other body or person, as the
respondent contends, or is to be permitted to the hypothetical new lessee,
whoever he or it may be, which is the contention put forward by the appellant
plaintiffs. The learned judge held that on that particular issue the correct
view to take was the former. It is against that decision the lessors now
appeal.
A similar
question also arose below in respect of the proper construction of the covenant
against alienation. On this point the learned judge held differently from his
view on the proper construction of the user covenant. He accepted the lessors’
contention that the reference to the British Crafts Centre in that part of the
existing lease was not intended to be personal to the respondent but that in
the hypothetical new lease, as it were, a blank would appear in the relevant
clause to be filled in with the name of the new and also hypothetical lessee.
The learned judge’s decision on this second point has not been the subject of a
cross-notice by the respondent.
The
appellants’ argument before us was four-fold. First, that in any event on the
lease as it presently stands, one cannot give a wholly literal meaning to the
definition of the ‘commercial yearly rent’. On the judge’s finding and the
respondent’s contention, there is to be substituted in the hypothetical new
lease for the phrase ‘the lessee (here meaning the British Crafts Centre party
hereto)’ the phrase ‘The British Crafts Centre’. This is inconsistent, it was
submitted, with the concept of a hypothetical new lease in which the British
Crafts Centre may be neither lessee nor a party to the conveyance. Second, Mr
Whittaker argued that when one looks at the actual drafting of the relevant
part of the user covenant in clause 2(16) of the lease it is not easy to
follow, but if the respondent and the judge are correct it involves giving a
new meaning to the word ‘lessee’ in that clause different from that in the
parties’ clause of the lease, with which I started this judgment, and in which
sense the word ‘lessee’ is used in numerous other places throughout the lease.
The appellants’ suggestion that there should merely be a blank in which the
name of the hypothetical new tenant could be substituted in this clause, as in
the covenant against alienation, involves substantially less alteration to the
wording actually used and for that reason also is to be preferred. Third,
counsel submitted that the learned judge was inconsistent in reaching different
conclusions on effectively the same point in the two covenants, the one in
respect of permitted user and the one against alienation. It was submitted
that, of the two, the latter
also.
Finally, Mr
Whittaker referred the court to The Law Land Co Ltd v Consumers’
Association Ltd (1980) 255 EG 617, [1980] 2 EGLR 109. In that case there
was a lease which contained a similar review clause to that for consideration
in the instant appeal. There was, however, a more limited user clause by which
the tenants
covenanted not, without the prior written consent of the landlord, to use or
permit the demised premises or any part thereof to be used, other than as
offices of the Consumers’ Association and its associated organisations.
Counsel relied
in particular on this passage from the judgment of Buckley LJ at p 623:
When one
considers that the hypothesis upon which the clause is to operate is that the
premises are vacant and that they are being offered on the market to a lessee
who is prepared to accept them upon the terms of a lease tendered by the
lessor, it is reasonable to suppose that the lease so hypothetically tendered
will be a lease in which the name of the lessee will not be stated, because the
assumption is that the lessee has not yet been identified. Also if the lease is
to be a lease in the form of that with which we are concerned [the user clause]
will necessarily be a clause in which the user covenant does not yet specify
the name of the tenant which is to be inserted in that clause, although it will
be drawn in such a way as to suggest that, when the identity of the
hypothetical tenant has been identified, the name of that tenant will be
inserted in the clause as the name of the Consumers’ Association is inserted in
the clause in the actual lease.
Mr Whittaker
submitted that Buckley LJ was there suggesting an approach to that particular
case which involved leaving blanks in the appropriate places in the respective
covenants in which the name of the new hypothetical lessee would be inserted,
as he contended should also be the approach in the present case.
Against those
contentions and on behalf of the respondent, Mr de la Piquerie argued, first,
that the learned judge was correct in the conclusion to which he came about the
proper construction of the user covenant (clause 2(16) of the lease). It was
clear, he suggested, that the benefit of that clause and of the clause
permitting sharing in certain circumstances of the demised premises was, and
was intended to be, personal to the British Crafts Centre only. It was not
intended to inure to the benefit of some wholly different hypothetical tenant.
That solution required, he contended, substantially less rewriting of the
actual wording of the clauses in the lease than would the contention of the
appellants.
As to the
alleged inconsistency between the learned judge’s decision on the two clauses,
the one as to user and the one against alienation, I think counsel in the end
accepted that it was not easy to reconcile the learned judge’s decision on the
two points and that perhaps it would have been better had there been a
respondent’s notice in this appeal, seeking to have the learned judge’s
decision on the non-alienation clause varied so as to conform with his decision
on the user clause.
In so far as The
Law Land Co Ltd case is concerned, Mr de la Piquerie submitted that when
one looks at the facts of that particular case, without a radical redrafting of
the relevant parts of the lease, and in particular of the rent review and user
clauses, there could not in the event have been the hypothetical open market
which those clauses postulated. Therefore, in that case one has to do a certain
amount of injury to the literal wording of the lease in order to enable just
that open market to be looked at as and when the rent review dates came up. That
difficulty will not arise in the instant case. The hypothetical open market can
well exist and can easily be considered on the terms of the instant lease as
they stand.
So much for
the arguments on each side. For myself I respectfully agree with the respondent’s
submission and the learned judge’s conclusion as to the proper construction of
the user covenant, clause 2(16). Although I think that the drafting of that
covenant could have been clearer, in my opinion its intention is clear. It was
to provide that the lessee should, first, be entitled to use the demised
premises for high-class business, commercial or professional offices; and
second, but only in respect of such part of the demised premises as are for the
time being occupied and used by the ‘lessee’, which in this instance and for
this purpose is to be restricted to the British Crafts Centre, the party to the
lease itself, for the further purposes mentioned. I prefer the learned judge’s
view about the proper construction of this clause because I think that it
involves the least alteration to the actual language of the lease and
covenants. It gives effect to what I think, on a careful consideration of the
covenant, was its clear intention, particularly because of the use of the word
‘here’ immediately after the first bracket in the sub-clause. Finally, I can
see in the circumstances a good policy reason for drafting the covenant in that
way. In so far as The Law Land Co Ltd decision is concerned, I agree
that that can and should be distinguished on the basis contended for by Mr de
la Piquerie on behalf of the respondent.
In so far as
the suggested inconsistency in the learned judge’s decision on the two
sub-clauses is concerned, we need not consider his decision on the second
because there is no respondent’s notice. If one is satisfied that his view on
the first is correct, then the fact that his view on the second was different
is not sufficient to make me change my mind on the first. I would add, however,
that if the second had indeed been for our consideration in this appeal, then
for my part I would with respect have reached a different conclusion upon it
from that of the learned judge below. Nevertheless it is sufficient for present
purposes to say that, for the reasons which I have sought briefly to indicate,
I think this appeal should be dismissed.
Agreeing,
BALCOMBE LJ said: The party of the second part to the lease of August 12 1977
is the British Crafts Centre. After the description of its registered office
come these words: ‘hereinafter called the Lessee’ . . .’ If this definition clause had stopped there,
it would have been no more than the parties making their own dictionary and
substituting two words for four, so that wherever in the lease you find the
words ‘the Lessee’ you simply read ‘The British Crafts Centre’. In fact the
definition clause goes on: ‘. . . which expression where the context so admits
includes the persons or corporate body in whom the term hereby granted may from
time to time be vested.’
When one comes
to consider clause 2(16)(ii) one finds these words:
. . . in
respect of such part of the demised premises as shall for the time being be
occupied and used by the Lessee (here meaning the British Crafts Centre party
hereto) . . .
As my lord has
said, with the benefit of the close attention this clause has received in two
courts, the draftsman might have found a happier form of wording, but it seems
to me clear that, in the light of the definition clause, what that subparagraph
means is ‘in respect of such part of the demised premises as shall for the time
being be occupied and used by the British Crafts Centre’, ie the context does
not admit a reference to anyone else, and indeed that meaning is strengthened
by the later part of the same subparagraph where there is a reference in
parenthesis to ‘(whilst not occupied and used by British Crafts Centre)’. On
that construction (which seems to me unanswerable), the way in which the
learned judge approached the terms of the hypothetical new lease imposes no
strain on the language used. It is merely saying what the lease already says,
although using more words.
I agree that
the case of The Law Land Co Ltd v Consumers’ Association Ltd is
distinguishable. In that case, unless some change was made to the wording of
the new hypothetical lease, there was no potential open market. That problem
does not arise here, because there is here under clause 2(16) (ii) a user ‘for
high-class business commercial or professional offices’ which is already
available to the world at large.
Finally, I
would add that I, too, am uncertain about the construction which the learned
judge gave to clause 2 (17A) (ii) of the lease (the proviso about sharing
occupation), but since there has been no respondent’s notice I need say no more
about that.
I agree that
this appeal should be dismissed.
Also agreeing,
BINGHAM LJ said: This rent review clause has the same purpose as every rent
clause, to provide for the rent reserved under the lease to be increased at the
stated intervals in line with rises in rental levels in the open market. Thus
the operation of any rent review clause involves a fusion of the actual and the
hypothetical. The rent to be determined is that actually to be paid by the
actual lessee under the lease in question or his successor in title, but the
measure of that rent is determined by reference to what would be paid by a
hypothetical willing lessee to a hypothetical willing lessor if the premises
were available for letting on the open market, which of course they are not.
Depending on the wording of the clauses in question, difficulties may arise (as
they do here) in determining where the actual ends and the hypothetical begins.
The lessee’s
covenant in clause 2(16) of this lease prohibits a long string of different
users. By way of exception from the prohibition, three users are, as I construe
the clause, permissible: (a) use for high-
and display of craftsmen’s work and ancillary offices; (c) use as an office and
studio for the trade or business of designers, advertising and press agents.
But each of these permitted users is subject to an express restriction.
User (a) is
permitted subject to the obtaining of appropriate planning permission. This
restriction is expressly stated in the language of the sub-clause, is quite
clear, and causes no problem of construction.
User (c) is
permitted in respect of the first floor of the demised premises ‘whilst not
occupied and used by British Crafts Centre’. The lease was expressly granted
subject to but with the benefit of an existing tenancy of the first floor and
this provision reflects that fact. This permitted user is subject to two
restrictions. First, it is permitted on the first floor only. There can be no
doubt about that. Second, in my view, it is permitted so long as the first
floor is not occupied and used by the British Crafts Centre. In this part of
the sub-clause there is no reference to the lessee. The reference is to the
British Crafts Centre alone. In my judgment, therefore, the hypothetical open
market rent is to be determined on the assumption that design, advertising and
press agency user is permitted on the first floor in all circumstances, save
when the floor is occupied and used by the British Crafts Centre.
User (b) is
permitted ‘in respect of such part of the demised premises as shall for the
time being be occupied and used by the lessee (here meaning The British Crafts
Centre party hereto) . . .’ Plainly
there is a restriction of the part of the premises in which this user is
permitted. This is defined by reference to actual events. There is also a
restriction of the party by whom such user is permitted. Under the actual
lease, as is agreed on both sides, this user is not permitted by a successor or
assign of the British Crafts Centre. If the sub-clause had simply referred to
‘the Lessee’ without amplification or qualification, there would be no problem.
This user would be permitted, subject to actual occupation by the British
Crafts Centre and any persons or corporate body in whom the term granted might
from time to time be vested. That follows from the definition of ‘the Lessee’
at the outset of the lease. The open market rent payable by the hypothetical
lessee would be determined on the assumption that such user would, subject to
occupation, be permitted. But the parties have stipulated that ‘the Lessee’
shall here mean the British Crafts Centre. There is, in my view, no escaping
from that, either in the actual lease or, because the hypothetical lease is to
be in the same terms, in the hypothetical lease. Effect must be given as
closely as possible to what the parties have agreed; otherwise there would be a
disparity between the effect of the actual lease under which the rent is after
all to be paid and the effect of the hypothetical lease, which is to provide a
measure of that rent. It would seem to be anomalous if an assignee of this term
were, following a rent review, obliged to pay rent based on an assumption that
a user was permitted because permitted to a hypothetical lessee although not
actually permitted to him. Such an anomaly should, I think, be avoided unless
one is driven to it.
I share my
lords’ doubts on the judge’s construction of subclause (17A) (ii), but this
does not affect the outcome of this appeal, which I also would dismiss.
The appeal
was dismissed with costs. An application for leave to appeal to the House of
Lords was refused.
